When counseling clients or judging startup completions, one of the biggest swag figures I see is related to the size of the market they expect to hit. These numbers are often extremely large which too often causes startups to overspend pre-launch based on the overly inflated prospect of future sales.

In an effort to determine your product or services real market potential, it is advisable to follow the three step process many venture capitalists use to determine a product or service’s real market potential.

1. The first step in determining your real market potential is to ascertain the size of the Total Addressable Market (TAM). For example, if you were the Dollar Shave Club, your TAM in the United States would be the total male population less males under 17 that do not yet shave.

2. However, your TAM is an unrealistic target since you would never capture the entire market with no competition. Therefore, you have to also determine the portion of TAM that is the Serviceable Available Market (SAM), in other words, the market portion that you can more realistically reach with your anticipated sales channels such as direct sales, affiliates, or dealer networks.

ROHO Inc. knew their product could be extended to other markets, such as relieving sores from motorcycle seats. However, its established sales channels for medical devices was not a good fit for extending its product line to these new markets. Rather than invest heavily in establishing a new sales channel to expand into a potentiality lucrative new market segment of motorcycles, ROHO Inc. decided to sell their technology to HESS LLC. HESS LLC already had a sales channel in place in the motorcycle industry with its Danny Gray Seat Design Division.

Therefore, your SAM is a more realistic target than your TAM. However, the SAM is still an unrealistic real target since you will never have a total monopoly on your SAM.

3. Finally, you have to estimate the percentage of the SAM that you can realistically reach and stimulate to buy from you. This is known as the Serviceable Obtainable Market (SOM) or your realistic target market. Your SOM is the the most realistic fraction of SAM you can hope to gain based on your customer acquisition strategy.

In conclusion, it is not advisable to determine your TAM and then immediately assume you can capture a percentage, such as 1%, without doing further research to determine your SAM and ultimately your SOM.

What are we selling? This is where we determine the specifics of our offering, not just in terms of product features and functionality, but also in terms of uses, pricing, messaging and offers. Following the minimum viable product (MVP) strategy, we create as little of the product as necessary to prove its economic viability. In fact, there are ways to do this without actually building the product, which I will explain in a future article.

Who are we selling it to? At this stage, we do persona mapping — determining the demographics and psychographics (personal and business) of who we think will purchase our product or service. Remember that who you think will purchase and who actually purchases may be quite different, so it is important to test this in the early stages of the launch.

Why do our prospects need this? Given all the ways our prospects can spend their money (or not spend it), why is our offering something that will grab their mind share and wallet share? What are the compelling factors that will make them overcome inertia and hit the “buy now” button or engage with a sales representative?

Where can we reach them? This is where you determine where your prospects hang out, what they read and who they listen to, and also where you discover which media are the best at reaching people who may not currently know who you are or why they may need you.

How do we go to market? I’ve written a lot about marketing and sales models, including this recent post where I discussed sales models as a core component of marketing and sales alignment. There are four major types of B2B models, including direct, telesales, channel and online, with dozens of hybrids and variations. There are ways to test these models at very low cost, with the goal of achieving a consistent and repeatable go-to-market model as you scale the business.

When should we launch? Okay, to confess, the “when” isn’t as important as who, what, when, where, why and how, but I needed it to complete the set. Actually, “when” can be important when you consider the impact of seasonal purchasing and competitive product launches. Enough said about this.

Marketing research does have its place in your go-to-market plan validation, but usually as a form of pre-testing. Conducting research online or at the library — or asking someone whether they would buy a product at a focus group – is not the same as proving whether there is a market for your product. Better to spend some time and a few dollars on the type of testing that really counts – whether your prospects will actually purchase of what you are selling. That’s the type of testing that gets me excited!

Businesses love talking about total addressable market because it’s exciting for them to see the available opportunity for their product or service. So exciting, in fact, that they often clammer to craft specific campaigns or shift messaging around new potential markets. However, if this is done hastily or without thorough research, it can turn into a waste of time and resources.

Determine Your Ideal Customer Profile

To find your total addressable market, you first need to determine your ideal customer profile, then find look-a-likes that accurately fit the mold.

Determining which data are relevant to your total addressable market is a challenge. With so much data available on both current and prospective customers, it’s hard to distinguish the signal from the noise.

The traditional way of figuring out significant information was to look at the accessible firmographic data. Firmographic data includes basic information such as industry, location, size, and revenue. While this is useful to include in your analysis,this type of data is only the tip of the iceberg. Additional business signals that are harder to obtain, such as web savvy or social presence, may actually be better predictors of success.

Let’s pretend for a moment that you are a point of sale (POS) system looking to sell your product. Perhaps you target restaurants, because they fit your ideal customer profile. You may have performed well with them in the past, so you continue searching for other look-a-likes in the same industry. But what happens when you throw a new industry in for comparison?

On the surface, with solely the firmographic data taken into account, the mechanic appears to have a lower success rate than the restaurants. This is where most marketers end their targeting exercise and launch campaigns targeted solely at restaurants. But look at how the success rates change when you add additional business signals:

With the additional signals taken into account, the business in a new and unexpected industry has a significantly higher likelihood of success than a formerly considered look-a-like.

This example reveals that before you deeming a category unfit, make sure you are looking at the best possible predictors of success. This advanced segmentation uncovered a more effective go to market strategy than the original idea to sell to restaurants.

In this case, social media presence was more indicative of success than industry.

The restaurant segment performed well because restaurants are more likely to be socially savvy than other small business industries. This new perspective with additional business signals revealed almost as high of a success with mechanics that were on Facebook as with restaurants on Facebook.

Discover the Size of the Market Opportunity

Once an ideal customer profile is solidified, the next step is to figure out how large the market opportunity is that fits the description.

Understanding your total addressable market will help you answer 4 key questions:

How long will my sales pipeline remain satisfied?

What is the real size of the market?

How many prospects can I expect?

What is the potential revenue for a particular quarter or year?

You can think of your total addressable market as the sum of your ideal buyer profile look-a-likes.

Let’s look at two scenarios to help understand how valuable it is to understand total addressable market for a product or service.

In this first scenario below, you have a segment that has a very high success rate compared to your typical conversion rate. Here is a highly targeted segment with an impressive success rate of 85.7%:

It is clear that this segment will perform well. However, the addressable market opportunity – as shown in the number of new and open records – is small. This segment should still be used, but it will soon need expansion to provide a full sales pipeline and fuel sufficient business growth.

Below is another scenario for comparison with one signal removed to widen the net of potential businesses.

In the second scenario, you have a segment that converts at a lower success rate, but with a much larger market opportunity available to target – as shown in the number of new and open records. Even though the success rate is lower in this scenario, it still has a high success rate at 67.7% – and is well worth targeting. The sheer volume of the potential in the new and open records make up for the slightly lower success rate.

The results from the second scenario are more helpful in determining the size and scope of the total addressable market because it is scalable. Continue this analysis process with additional high performing segments that have ample market opportunity to effectively visualize your total addressable market.

Conclusion

Estimating the size of your market used to be a struggle that involved informed guesswork and complex calculations. Now, there are tools available to businesses that automate the total addressable market discovery and execution process. Taking advantage of these tools gives marketing and sales teams confidence that they are focusing on the right market segments and opportunities. Marketing organizations in particular need to be more strategic in their analysis because their efforts span a large scale that requires significant resources. Gaining a realistic understanding of your ideal customer profile and your total addressable market will help your entire organization become more targeted and effective.

The images in this post are of the Radius product. If you would like to learn more about Radius, click here.